Tag Archives: capesize vessel

Cape Asset Pricing Improvement, for now

Cape Asset Pricing Improvement, for now                                                                                         Sale & Purchase Update, September 30th, 2013

The capesize market had a terrific last two months with freight rates briefly passing $40,000 pd recently for an eye-catching improvement of almost 300%.  As phenomenal such rates as they may be, one may even call them a ‘fantastic object’ as legendary investor George Soros might  say about a situation like this, unreal but immensely attractive; besides the obvious question on whether the freight rally is sustainable, there have been anxious inquiries on the impact of the rally on asset pricing, especially for modern capesize vessels.

We understand that the 2013-built at IHI (now called Japan Marine United after the recent merger with Universal Shipbuilding Corporation) 180,000 DWT capesize vessel MV „CAPE CHALLENGER 1” was sold last week at about $51 million. Although the owner of the vessel was a Japanese local company, we understand that the sale was controlled by Mitsubishi Corp as the Sogo Shosha. There are conflicting reports on the buyers, ranging from private Greek owners (Carras Hellas) to the publicly traded Navios Group (if the buyer is a publicly traded company we are sure to have the obligatory PR in due course.)  Also this week, the 2013-built at Hyundai Heavy (HHI) 173,000 DWT capesize vessel MV „JK PIONEER” has been reported sold, possibly to clients of Diana Shipping (DSX) at a reported price of $52-53 million. Sellers are Korean-based JK Maritime, and the solid price is partially attributable to ‘eco design’ of the vessel and very good ‘spec’ despite the below market charter-attached of about $11,500 pd for six more months (which, if true, would impacted negatively the price.)

A big ship! (Image source: Vale)

A big ship! (Image source: Vale)

These two sales indicate substantial improvement for modern cape pricing over the last few months based on a market comparison analysis. About a month ago, Belgium-based Bocimar sold their 2012-built by Hanjin Subic in the Philippines MV „BULK CANADA” at $41.5 million to Norway’s Berge Bulk; given the perceived ‘weak’ name of the shipbuilder in the marketplace, some discount is attributable to such fact. Shortly before that, in late July, Jinhai Heavy Industries-built / controlled 179,000-dwt Hull No J0021 with 2013 expected delivery was sold at a reported price of $38 million to reportedly Greek interests (possibly, Marmaras Navigation.) This vessel had been ordered in 2010, based on information from market reports at the time, on behalf of Fredriksen’s Golden Ocean concern with an expected April 2012 delivery, but accurate details of full-fledged newbuilding contract details, such as refund guarantees, down payment, etc are thin at least. In any event, both these older sales deserve a downward adjustment of a couple of millions due to their shipbuilding pedigree and the potential lack of any extra TLC provided during their construction; and, both of the current sales came from high quality yards and seem to be of good specification, at least of specification not seeing in the market that often from sale candidates.

Based on these sales, there has been an asset appreciation in play to the tune of probably more than 25% over the last two months (when adjusting for age, spec, quality of parties involved, reputation of shipbuilders, etc)  No bad for two months’ time, especially after the misery of the markets in 1H2013; and, again, freight improved by ten times as much in almost the same interval.  Based on our discussions with market players, we understand that several modern capesize owners were approached about the possibility of selling vessels, providing another sign that the sentiment, at least temporarily, has improved and underlying the ever stated argument that there are no good vessels for sale.

It will be interesting seeing how the market will develop, and whether the present developments in the cape S&P market are indeed signs of a cyclical recovery or just another ‘false positive’ temporary peak.  At least for the immediate future, the market is widely expected to take a breather with Golden Week underway in China – the mother of the cape market; also, the paper market (FFAs) have not softened in the last two weeks despite the improvement of the spot market (CAL 14, CAL 15 and CAL 16 trade at about $17,000 pd,) well below the spot market, although the paper markets in shipping often trade in backwardation.  And the drop over the last two weeks for HRC steel has dropped by $20/ton squeezing the margins for the steel mills.

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.

Shipping Paranoia

In one of the best business books ever written, in our opinion, ‘Only the Paranoid Survive‘ by the former CEO and Chairman of Intel Andy Grove, the then young executive Grove is agonizing with Gordon Moore, co-founder of Intel and brilliant engineer (of the ‘Moore’s Law’ fame in the semiconductor industry), about the price war ensued by the Japanese in the DRAM memory chip business and Intel’s precarious position.

Only the Paranoid Survive

Only the Paranoid Survive

Grove recalls early in the book:

“I looked out the window at the Ferris wheel of the Great America amusement park revolving in the distance, then I turned back to Gordon and I asked, “If we got kicked out and the board brought in a new CEO, what do you think he would do?” Gordon answered without hesitation, “He would get us out of memories.” I stared at him, numb, then said, “Why shouldn’t you and I walk out the door, come back and do it ourselves?”

This may seem like a casual observation, but Intel effectively invented the DRAM chips and Moore’s suggestion to get out the market was almost sacrilegious.  Intel did indeed move away from memory chips and into value-added ‘mother boards’ and laughed all the way to the bank for the next decade or so by riding the ‘Wintel’ infrastructure of the PC market. (Different times, different gadgets!)

It’s amazing how vested people become in a situation, whether job or company or industry. As long as one is on the ‘inside’, the never-ending cyclical path around the water well seems to be a purpose by itself. It takes often some stepping-back in order for one to get a better perspective of the right priorities, like Grove’s insightful question what would a new team with a clean slate and mandate do to solve a problem.  Apparently both Grove and Moore had intimate knowledge of the company, the industry and the engineering behind them and the answer become obvious instantly; a new team may have to spend time on consulting reports, take more time, do their own analysis and possibly could never see the ‘light’.

Shipping and maritime are integral industries in our every day lives, and no doubt they will remain important going forward. However, the dramatic drop in asset prices (compared to 2008 peak pricing levels) has induced a tremendous wave of newbuildings. It almost seems like a race to the shipyards (at least the ones that provide competitive pricing and lenient payment terms) to build more and more vessels in the mainstream markets; bit more fuel efficient than older vessels, bit bigger in cargo capacity within same asset class, bit better standards of workmanship than the ones from fresh yards a few short years ago.  However, in our opinion, the amount in newbuildings is not justified by the market economics and demand for cargo.

2013 09SEP PARANOIA B

We run two basic scenarios evaluating historic returns on major asset classes in shipping: under the first, long-term scenario (TABLE 1), the vessels were bought and paid for at the beginning of 2001 and were held till present; purchase price and residual price are real (nominal) prices and freight rates have been the average freight for the whole period; operating expenses (inclusive drydock) are shown in the table herebelow for each category; also, it is assumed 60% mortgage on the vessels at 6% interest rate. The IRR is calculated for each asset class, and the returns have been ranging from single digit rates (MR tankers with 8%) to highly respectable 37% for capesize vessels. It needs to be noted that historically, 2001 has been a good year for one to enter the market and the almost twelve years of this scenario include the best shipping cycle known to man.

Under the second scenario (TABLE 2), since the beginning of 2006 till present, the same assumptions have been maintained.  Returns however under this scenario range from negative returns to barely adequate of 14% again for capesize vessels.  In 2006 asset prices had already moved significantly higher than 2001 and since then, there has been ‘the best of times and worst of times’ in terms of freight rates with extreme example in early 2008 capesize and VLCC freight rates at $150,000 pd spot market and negative freight rates in 2009 and 2010 (‘back haul’ to reposition vessels).

We acknowledge that our scenarios are rather simplistic by presuming average rates and average financing terms and holding onto the assets, thus excluding any ‘asset play’ (capital gain from asset appreciation) when sometimes where most of the opportunity lies in a highly volatile industry like shipping.

Shipping and maritime are rather risky business and the cost of capital (discount rate) has to be rather high. The achieved historic returns really do not justify an investor being aggressive on acquisition pricing or one orderbook.

Going back to the newbuilding race, are investors are losing the trees for the forest? The vessels for the ocean? Revisiting Grove’s question, if one was not vested in a company or an asset class or the industry, what would have been the ‘right’ thing to do?

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.

Between an Australian (Iron Ore) Rock and China’s Hard Place

China’s intended policy to ‘rebalance’ their economy with a greater focus on consumption rather than investment logically could have a negative impact on shipping, especially for large vessels that transport raw commodities to China such as capesize vessels. As more money is being spent domestically on consumer products and services, including either domestically procured or imported luxury goods, where there is more ‘value added quality’ than rudimentary processing of raw materials such as for real estate and infrastructure, big dry bulk vessels may be set for a tough few next years.  A recent article in the New York Times on the ‘credit crunch’ and curtailing some of the ‘shadow banking’ may be an early precursor of what is to be expected.

The price of iron ore, the commodity with the highest seaborne trading volume after crude oil, over the last decade has increased threefold, primarily due to China’s insatiable demand due to urbanization and infrastructure-building spree. Iron ore with 62% ferrous content delivered to Tanjin has been quoted presently at about $130 per ton, a 20% improvement since May alone, when China embarked on a buying spree of the commodity in order to primarily replenish inventories.

Mining companies have been planning a $250 billion investment in order to expand capacity; most of the investment is planned by the industry’s major (and most bankable / competent) players, like Rio Tinto Group (RIO), Vale SA and BHP Billiton Ltd. (BHP), which implies a high degree of diligent execution and delivering of the projects on time. Given the lackluster world economic growth and China’s decelerating economy, most analysts expect a glut in the iron ore supply with prices set for a decline to levels around $100 per ton, on average, over the several years; some analysts even expect that temporarily iron ore may dip well below the $100 / ton mark, meaning rather bearish prospects for the commodity. As a general rule of thumb, bear commodity markets imply bear shipping markets, correspondingly, since there is a very high degree of correlation.

Just to re-ascertain the point of a bear iron ore market may not be good for the capesize vessels, most of the investments and the planned investments for increasing iron ore capacity are taking place in West Australia. In a recent report produced by Goldman Sachs, seaborne supply of iron ore is expected to grow from an estimate of about 1,150 mtpa in 2013 to approximately 1,500 mtpa in 2017, for an overall 30% increase. However, during the same interval, seaborne iron ore supply from Australia is expected to by 44% while from Brazil by ‘only’ 30%. Nothing shabby with these growth rates – as long as you are not a mining company, but, really not a cause to pop a champagne bottle for a shipowner.

Chinese Iron Ore Imports & The BCI

As anyone can quickly ascertain by taking a look at a world map, Australia is much closer to China than Brazil, and it takes three times more ships to transport the commodity from Brazil than from Australia to China. On August 16th, the Baltic Exchange in its daily report was posting the ‘C3 route’ Tubarao-Qingdao at $20.73/ton while the ‘C5 route’ W Australia-Qingdao at $9.01/ton.

The Balics

While over the next five years seaborne iron ore supply is expected to grow by 30%, the supply of capesize vessels (about 180,000 dwt) and Very Large Ore Carriers (VLOCs) (>200,000dwt) is expected to grow by 13% in the next three years, based on firmed, confirmed orders by bankable players (and thus high certainty of actual delivery of the vessels). This again is the firm, known supply, and with the shipbuilders with plenty of spare capacity and desperate need of new orders, it could easily be revised upwards. Not to mention that if iron ore gets cheaper, so it will be the case with newbuilding vessels, which could lead to another round of increased newbuilding frenzy. And, this, at a time when capesize vessels have been averaging $9,000 pd in the freight market, barely sufficient to cover their daily operating expenses (the less said the better on their financial cost, since some such vessels were bought for more than $100 million, and an ‘average’ term amortizing mortgage would presume more than $25,000 pd payment).

It has been said that you never appreciate a friend or ally until you are really in need. China in the last decade has been the cause of ‘irrational exuberance’ in shipping and its excesses thereof, and many other industries of course, such as the mining industry and their ‘commodities super-cycle’. Now that China seems to be slowing down, still to levels that many developed countries only would dream of, the ‘decoupling’ for many industries seems to be messier than expected. But again, China is full of surprises and broken projections …

© Basil M. Karatzas 2013 All Rights Reserved

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